If a levy on financial transactions is imposed, the one bit of our economy
with the locomotive power to pull us back to growth will be disabled.

The euro isn't finished yet. There is, as Adam Smith observed, a great deal of ruin in a nation, and the same is true of a currency. Monetary union was never meant to be about prosperity; rather, it was about political integration. Those who benefit most from such integration, namely the Brussels elites, won't give it up without a fight.

A fight, in this context, means trying to create what Herman Van Rompuy, the EU President, calls "European economic government". Rather than allowing peripheral states to leave the euro and devalue, Eurocrats aim to keep their dream alive through massive cash transfusions.

At a summit on Thursday, the European Commission will push for financial harmonisation, including the pre-vetting of national budgets, a ban on short-selling and the apparatus of fiscal federalism. David Cameron, who wants to focus on bringing down the deficit in Britain, would gladly do without the distraction of a Euro-row. But the EU is disinclined to give him that option.

After all, the survival of its entire belief system is at stake. If the euro collapses, European integration itself might unravel. In order to stave off this prospect, Eurocrats need a great deal of money – including British money. Last week, Van Rompuy admitted that, in the event of a Spanish bail-out, even the 750 billion euros already committed would not be enough, and the 16 eurozone members are reluctant to underwrite Madrid without British participation. London banks, they argue, would be among the worst hit by a Spanish default. Why should Continental taxpayers bail them out if British taxpayers stand aloof?

Until now, the travails of the euro have not been our concern – except in the indirect sense that we want our trading partners to be prosperous. But an entropic union is a dangerous neighbour and, as Brussels steps up its demands for economic integration, the euro's problems are becoming our problems.

The coalition has so far avoided arguments about the EU. I know that pundits keep trying to run stories about tensions between the Lib Dems and the supposedly Eurosceptic William Hague, but these stories depend on blocking out everything that the Foreign Secretary has been saying for the past three years.

"We should be committed to a stronger European voice in the world," he announced before the election. "It is the common will to act together that is decisive. European unity is lacking on so many issues." Last week, he and Nick Clegg travelled together to Berlin to reiterate that message.

Ministers are, quite rightly, focused on the domestic agenda. Neither coalition partner wants a Euro-squabble. The Lib Dems have quietly forgotten about their ambition to join the euro, the Tories have toned down their commitment to repatriate power, and both parties have dropped any talk of a referendum. The trouble is that the EU is in no mood to allow Britain the option of quietism. The measures being proposed by the European Commission directly threaten our prosperity and our independence.

First, there is the straightforward cost. There has been much anguished debate about the proposals to trim spending by £6.2 billion. In contrast, there has been barely a whimper about the £8 billion committed to the EU's bail-out fund by Alistair Darling in his outgoing act as chancellor.

At a time when every department is looking for savings, our net contribution to the EU budget is rising by 60 per cent. You don't have to be a Eurosceptic to ask why, when all 27 member states are making cuts, the EU is going in the opposite direction. Nor do you need to be a fiscal conservative to wonder whether our budget contributions might be better used: they are enough, for example, to give the entire country a two thirds reduction in council tax.

Then there is the issue of EU taxation. Both the Commission and the European Parliament want a levy on financial transactions – the overwhelming majority of which take place in London. Some of our competitors see, in this idea, a new Common Fisheries Policy – a mechanism whereby they could draw from a pot being disproportionately filled by Britain.

Most immediate are the plans for EU supervision of financial services. Already, the Commission has determined a set of rules that will be ruinous for investment fund managers. Now it plans something even more dangerous: the transfer of invigilatory power from national regulators to three new EU agencies dealing, respectively, with banking, securities and insurance and pensions. London would find itself administered by states which have negligible financial sectors of their own, and which, in some cases, regard "Anglo-Saxon capitalism" as immoral.

On all these issues, the coalition is more united than you might suppose. Lib Dem MEPs did their best to mitigate the impact of EU financial regulation. The trouble is that few other countries sympathise. Some resent Britain for refusing to join the euro; others envy the supremacy of the City of London; still others simply dislike free trade. Since most of the proposed measures can be imposed by qualified majority voting, there is little prospect of blocking them.

Make no mistake, though, about the magnitude of the danger. If these proposals go through, London will go the way of Bruges, Venice and Amsterdam: a once dominant financial entrepôt sidelined by more virile cities. The one bit of our economy with the locomotive power to pull us back to growth will be disabled.

We do, though, have one other option. We could behave as the French did when they were told to admit British beef, or as the Italians are currently doing over demands that they change their rules on media ownership. We could simply announce that financial services are a red-line issue for us, as agriculture is for France, and that we will not implement any directives damaging to the City. In a worst-case scenario, we might be fined: but the maximum notional fine is minuscule compared with the costs of compliance, and could simply be divided among the affected institutions and called a "fee".

True, this line of action would involve us in precisely the sort of spat with the EU that the coalition wanted to avoid. But the alternative is to jeopardise our recovery. It is Brussels, not Britain, that is provoking this fight.

Daniel Hannan is a Conservative MEP for South East England and writes every day at Telegraph Blogs